How to Make a Credit Card Repayment Plan with a Debt Collection Agency

Q: Last year my roommate went through a tough time financially and ended up having a collection agency hound him about his overdue credit card bill. It was a difficult time for him and caused him a lot of stress until his parents helped him out. I was laid off from work three months ago and have just got back to work. I’ve exhausted my savings and I’m behind on my credit card payments. I’ve called my bank to let them know what’s going on but they weren’t able to do anything for me. Last week I received a notice in the mail from a collection agency advising me my credit card bill has been turned over to them, and then today someone from the collection agency called and left a message on my phone. I don’t have $5,000 to pay my balance in full and I don’t have anyone who can help me out. What should I do? ~Jamie

A: As difficult as this might seem, don’t panic. Cool heads prevail especially when working through a difficult situation. The collection agency is obligated under provincial debt collection legislation to inform you that they have been retained as a third party collection agent on behalf of your bank. Collection agencies and collectors also have to abide by provincial regulations that govern what collectors can and can’t do to collect an account on behalf of a creditor.

What Collectors Can and Can’t Do

In a nutshell they have to treat you in a fair and respectful manner while attempting to collect the outstanding account. They can’t threaten or harass you. If they do, you have the right to file a complaint against them with the appropriate government consumer protection office. If a collection agency or collector is found to be in violation of the debt collection regulations they could be subject to stiff financial penalties all the way up to a suspension of their licence.

How the Debt Collection Industry Works

Before contacting the collection agency it’s important to understand how they are compensated by the bank that holds your credit card. Collection agencies primarily work on a commission basis which means that the quicker they can get you to pay your account in full the more commission they will earn. This commission is paid to the collection agency by the bank. The collection industry is highly competitive. Creditors will reward the collection agencies who are able to recover the highest percentage of delinquent accounts in the shortest amount of time with a larger share of new delinquent accounts in which to generate more commissions.

What this means to you is that the collection agency is not likely to accept a payment arrangement from you until they believe you have exhausted all means to pay the balance in full or pay it in the shortest amount of time possible. As strange as it may seem, even though your bank has assigned your account to the collection agency your bank still considers you as their customer and wants the collection agency to treat you in a respectful manner and to abide by all government regulations.

They say that knowledge is powerful and it certainly is in this situation. You have the ability to take control and work out a repayment plan with the collection agency that is reasonable and within your means because now you know that:

Collection agencies have no special abilities in which to enforce the repayment of an account

While collection agencies may in some cases pursue legal action against someone who is not willing or able to pay, it’s the last thing they want to do. Legal action will delay the repayment of an account and the consumer has the opportunity to put forward a repayment proposal to the courts. Generally speaking the courts will support a reasonable repayment plan put forward by a consumer.

Now that you have a better understanding of how collection agencies work, you can turn your focus to resolving your credit card debt problem.

Here are 7 steps to help you successfully negotiate a repayment plan with the collection agency:

Step 1: Contact the Collection Agency & Advise What You Plan to Do

Contact the collection agency and advise them that you have just returned to work and intend to work out a repayment plan with them. However, you will need a week to review your budget and determine how much you can afford to pay. They may advise you that they need a payment from you in good faith to hold the account. Inform them that you will not be sending a payment to them until you have reviewed your budget.

Step 2: Keep Notes & Follow Through on All Promises

When speaking with the collection agency keep notes. Write down the times and dates you speak with them as well as the name of the collector you speak with (they are required by law to provide you with their name). Advise them that you will be initiating all future calls to their office. Instruct them that they are not to contact you by telephone. In order to gain their cooperation you must follow through on all promises you make, starting with your promise to contact them again on or before the date you outline in your repayment proposal. If the collector is being difficult ask to speak with their supervisor and restart the conversation until they accept your offer.

Step 3: Determine How Much You Can Afford to Pay Each Month

Carefully review your budget and expenses to determine how much you can reasonably afford to pay toward your account each month. If you are behind on other bills it will be necessary to bring those up to date in a reasonable amount of time so that they do not end up being assigned to a collection agency as well. If you have the ability to borrow the funds at a reasonable rate of interest to pay the account in full, and can comfortably manage those loan payments, I would encourage you to do so. I would not recommend contacting family or friends for assistance as it can put a lot of pressure on a relationship.

Step 4: Outline Your Budget & Provide Proof of Income

To gain the cooperation of the collection agency they will want to have a copy of your budget along with your repayment plan. Your budget should provide sufficient detail as to how much you earn each month, a detailed list of your expenses as well as any other debts you are paying. I would also include a small allocation in your budget for emergency savings $50 – $100 if you can manage it to help you deal with unexpected expenses. To validate your income provide them with a copy of your paycheque or pay stub but I would blackout the name and address of your employer to avoid the collection company contacting you at work.

While it will take you a period of time to repay your debt, start by making a payment each month and offer to review your budget and monthly payment amount in three months. This will demonstrate your desire to resolve the account balance in a responsible manner. Be prepared for some pushback from the collection agency that you will need to cut your expenses further. Keep in mind that the collector is interested in one thing; earning a commission. If your budget is reasonable and you have accurately listed your expenses and reduced your discretionary spending, stand firm and do not allow the collector to get you to commit to a higher payment than you can afford.

Step 6: What to Do if a Collector is Unreasonable

If the collector is unreasonable ask to speak with their supervisor. Advise them that you are offering them the most you can afford to pay at this time. If the supervisor is uncooperative advise them that you will follow through and make the payments outlined in your repayment plan on or before the date specified and will follow up with them again in three months. Advise them that as long as you maintain your repayment plan you do not want to receive any contact from them by telephone; if they do not respect this you will file a complaint against them.

Step 7: Where to Get Free Help Creating a Budget & Repayment Plan

If you’re having difficulty developing your budget or just need some guidance before you speak with a collection agency, contact a not-for-profit credit counselling agency for help. Their counsellors have the knowledge and experience to help you work out a reasonable repayment plan with your creditors that fits your budget.

The Bottom Line on Dealing with Collectors and Collection Agencies

While no one ever wants to speak with a collector, life events happen beyond our control and you may find yourself having to deal with a collection agency. By understanding your rights and responsibilities along with some knowledge about the collection industry, you can regain control of your finances and put yourself in the driver’s seat when negotiating the repayment of your credit card debt

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email, check www.nomoredebts.org or call 1-888-527-8999.

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